Are you interested in acquiring oil and gas royalty payments? Then you’ll need to know how you can get them. Oil and gas royalties are payments that a person or entity will receive. They will receive it if they own the mineral rights. Another way is if they assist in the extraction process of a piece of land. This land produces and sells valuable minerals. In this article, we will explain the two main kinds of oil and gas royalties. Additionally, learn how you can add them to your portfolio.

Royalties from Mineral Rights vs. Overriding Royalty Interests

There are two main kinds of oil and gas royalties: producing mineral rights and overriding royalty interests. The important difference to know between the two is that mineral rights ownership involves actually owning the subsurface of the land producing oil and gas, whereas overriding royalty interests are paid to people or entities that help produce the oil or gas itself.

How to Get Mineral Rights for Oil and Gas Royalties

There are three ways in which you can own mineral rights. You can buy mineral rights, inherit mineral rights, or receive them as a gift. If you purchase a plot of land in a fee simple estate, that means that you own your mineral (subsurface) rights in addition to your surface rights on which you can build. In some states, you may purchase the surface rights of a piece of land while another person or entity may already own the mineral rights below.

How to Receive Oil and Gas Royalty Payments from Mineral Rights

If you own mineral rights or a portion of a piece of land’s mineral rights, then you own a valuable asset. If that land has oil, gas, or another valuable substance extracted from its subsurface, then you will receive a portion of the profits when the minerals are sold. Usually, this comes in the form of a monthly payment. You can also sell your mineral rights as a way to earn a large lump sum.

How to Get Overriding Royalty Interests

You don’t own the mineral rights of a property? You can still earn oil and gas royalty payments in the form of an overriding royalty interest. Overriding royalty interests (ORRI’s) are also given a portion of the sale of extracted oil and gas, however, they are given to those assisting the in drilling and will disappear after the operation is over. ORRI’s are often given to geologists, brokers, landmen, and other people or entities that help bring minerals to the market.

Mineral rights are an extremely valuable asset to own in the United States.  Whether your mineral rights are currently producing oil and gas royalties or they have the potential to become a highly profitable extraction site, it is often difficult to make a decision as to should you sell your mineral rights or not.  In this article, we will define mineral rights and explore the benefits and drawbacks of selling your mineral rights.

 

What are Mineral Rights?

Mineral rights refer to the ownership of the subsurface of a property.  Mineral rights owners are entitled to accessing, extracting, and selling the resources below the surface of the Earth.  The surface rights owner can be entirely different than the mineral rights owner, which can be both one person, several people, or a larger entity.  The United States is one of the few countries in the world in which mineral rights can be bought or sold.

 

Should I Sell My Mineral Rights?

If you own producing mineral rights, then you are probably very familiar with the income owning mineral rights can provide.  Although you will no longer receive your monthly oil or gas royalty check, selling producing mineral rights can also be a great decision.

Perhaps you bought a fee simple estate in which you own both your surface rights and mineral rights, and someone has approached you with an offer to sell your mineral rights which are currently not producing.  In cases like this, there are also many pros and cons of selling your mineral rights.

 

Pros of Selling Mineral Rights

Selling mineral rights has the following advantages:

• Instant Cash Lumpsu in Your Pocket
• Less Taxes to be Paid Each Year
• Eligible for a 1031 Exchange

 

Cons of Selling Mineral Rights

Drawbacks of selling mineral rights include:

• No More Monthly Income (if your rights are producing)
• Loss of an Asset that Could Increase in Value

 

Alternatives to Selling Your Mineral Rights

If you are interested in earning money from your mineral rights but do not want to sell them, you can consider leasing your mineral rights to an oil and gas company.  In a mineral rights lease, you will still own the mineral rights of the property and may receive oil and gas royalties from the third party’s production.  Mineral rights can also be gifted or bequeathed to another individual or entity.

 

Conclusion

Ultimately, the decision of whether or not to sell mineral rights is up to the mineral rights owner. If you are considering selling your mineral rights, then it is always best to consult an expert to help you earn a fair price and ensure that you earn as much as possible off of the sale.

An oil, gas, or mineral lease is a legally binding agreement between the mineral rights owner and the company bringing the oil, gas, or mineral reserves to the market.  Agreements between landowners and oil companies date back to before 1900, though the process is still generally the same.  Knowing the details of an oil and gas lease is crucial before agreeing to anything that is legally binding.

What does a Standard Oil and Gas Lease Look Like?

Although this is a valid question, unfortunately when it comes to mineral leases:  there is no standard. Instead, they are made up of different clauses and sections.  Here are the parts of an oil and gas lease that are most common.

Dates Clause

The dates clause establishes the date, time, and primary term of the lease.  This is included in every mineral lease.

Parties Section

The parties section lists the names of all persons bound to the lease.

Consideration Section

Here, the legal terms of the lease are outlined and made enforceable to all parties the lease pertains to.

Granting Clause

The granting clause defines the property and purpose of the lease.  It then goes on to grant the use of the property to the lessee.

Royalty Clause

The royalty clause is very important to the lessor, or the mineral rights owner.  Here, the percentage of the proceeds of extraction is outlined for the amount and means of payment.

Drilling and Delay Rental Clause

This clause will allow the lessee to defer the immediate use of the property.  Delay rental fees are also under definition here.

Dry Hole, Cessation, and Continuous Drilling Clause

If the land is not found to contain minerals (aka a “dry hole”), this clause grants the lessee power to cease production.

Pooling Clause

This clause allows for the lessee to pool together multiple losses in order to form one larger drilling operation.

Surrender Clause

Here, the rights to surrender the lease are in definition for the lessee.

Damage Clause

Liabilities of the Lessee are in detail in the damage clause if any significant damage is present to the property.

Assignment Clause

The assignment clause protects both sides of the lease so that either party can transfer the rights or ownership of the property with the outlined notice.

Force Majeure Clause

In this clause, the lessee has protection from nonperformance in the declaration that the lease is by state and national laws.

Warranty Clause

The warranty Clause is important, as it guarantees rights to the land to the lessee if the lessor happens to default on mortgages, taxes, or other obligations causing them to forfeit their ownership.

Understanding mineral rights is easy.  Understanding the taxes associated with mineral rights is a bit more complicated.  The short answer is Yes.  If you own producing mineral rights, then you must pay property taxes on them.  This is because, like surface rights, owning mineral rights means that you own real property, even if it is just a fraction of an estate.

You cannot go and “visit” your mineral rights property? Since it is below the surface of the Earth, it still exists, and therefore is taxed as property.  If you only own a fraction of the estate, which is very common, then you will only have to pay a fraction of the property tax as well.  The amount of taxes is based on the volume or the value of the minerals produced.

It is very important to note that in most states, this property mineral rights tax is only enforced when the property is in production.  When in production, the tax is only billed and collected once per year.  If you own non-producing mineral rights, such as the land below your suburban residence, there is a good chance that your annual property tax will not include an amount associated with your mineral rights.

Can I be exempt from taxes on my Mineral Interests?

Yes.  Standard property tax code exempts mineral rights owners from paying taxes on very small amounts.  The current threshold allows mineral interests valued below $500 to be exempt from taxation.

How do multiple property taxes work with an oil or gas lease?

If you own an oil or gas lease, chances are there may be multiple wells on the property.  Each well is considered to be a different piece of property and you will, therefore, have separate mineral rights taxes for each one.

If you have further questions related to the topic, feel free to reach out to us here.

Fee simple ownership is most commonly referenced today when purchasing new real estate.  Fee simple is a legal term and is the most common and absolute type of property ownership in the United States.  If you are buying land or looking to sell, lease, or purchase mineral rights, understanding fee simple ownership is crucial.

What does Fee Simple Ownership include?

Fee simple ownership encompasses an entire personal estate.  By owning a fee simple estate, the property owner has control over the surface rights, subsurface rights, as well as the rights to the air above the property.  Each of these rights (or all of them together) can then be sold, gifted or bequeathed to another individual or entity by the property owner.  In some states, it is also possible to lease the surface or mineral rights of a property for an extended period of time.

Who Can Own a Fee Simple Estate?

In most of the world, any resources found beneath the Earth’s surface belong to the government in which the land resides.  The United States is one of the few unique countries in which fee simple ownership is possible, as property owners have the ability to own their subsurface and mineral rights. Owners of single-family residences most commonly have a fee simple estate, whereas those who share land or space, such as in apartments or townhomes, rarely have fee simple estates.

Owning Surface Rights Without Mineral Rights

It is entirely possible to purchase land without a fee simple estate.  In some cases, the mineral rights of a property are owned entirely by a different person than the surface rights.  In this scenario, you can still purchase the surface rights in order to build and live in a home on the property, however, you will not own the minerals below the surface of your land.  Although the law varies from state to state, you may be entitled to compensation for damages to your property’s surface through the extraction of minerals.